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Finding a Property

Identifying areas with the best rental yields

If you’re new to being a landlord, you might hear or read about ‘yields’ and be wondering what these are.

In short, the yield is the annual rental income expressed as a percentage of the purchase price. So to get the best yields, you need to find a property with a low purchase price that commands a reasonably high rent.

For example, let’s imagine you’ve bought a house for £100,000, and rent it out for £600 a month. Over 12 months, you’d get £7,200 in total – or 7.2% of your purchase price.

Higher yields mean you could pay off your mortgage sooner, build up a nest-egg to invest in another property, or simply live a more comfortable lifestyle as a full-time landlord.

Spotting a hotspot

Let’s imagine you’re searching the whole country for somewhere to buy.

Taking the logic that properties with low list prices return the highest yields, you could rule out many parts of London, the commuter belt, and the South Coast fairly quickly. You could probably also strike off affluent smaller cities and towns with inflated property prices, like York, Bath, and Harrogate.

And research from TotallyMoney, reported by Landlord Today in 2016, supports this thinking. It listed many of the lowest yields as coming from London, the Home Counties and Dorset.

Conversely, it named regenerating cities in the regions as offering the best yields – close to 10% of the list price each year. Among the top 10 performing postcodes were city centre locations in Manchester, Liverpool, Preston, Sheffield and Bradford.

Thinking closer to home

Yield calculators assume the property is rented out 12 months of the year. So to ensure it never sits empty – and you never have to drop the rent – you need to look for areas of high demand.

Demand comes from a large pool of potential tenants, and that means understanding renter demographics.

On the whole, Government research shows private renters in England are more likely to be young (almost half are under 35); less likely to have children (65% of rented households are child-free); and fractionally more likely to be living with a partner (51%) than single or house-sharing.

Painting with broad brushstrokes, your target customer is therefore under 35, childless, and living with their significant other.

Getting down to business

Your challenge is to identify where these people live. And of course, they live all over the country. The question is, where will you findlots of them?

Common sense tells us that people can only live where they can find (and easily get to) work. So the first question is actually ‘Where are the jobs they want?’.

So we’re now thinking of a town or city with an economy strong enough to support a large number of, perhaps ambitious, young professionals. Lots of university leavers, maybe; decent nightlife and public transport; a thriving creative sector.

Suddenly, the names on that list of best-performing postcodes – Manchester, Sheffield, and so on – make sense.

Applying this thinking locally

Assuming your property search isn’t nationwide, you can still apply this thinking to your local area. Be on the lookout for properties that are:

  • Right-sized for a couple (or two sharers)
  • Close to public transport or walkable to areas of major employment
  • Nearby to local shops, bars, restaurants, theatres etc.
Capital gains yields

A second kind of yield could also be factored in when making a decision: capital gains. This purely means the degree to which your property will rise in value during your ownership.

Some areas will outperform the market, rising quickly as they become fashionable or desirable. Identifying these areas is no easy task, and if you’re not familiar with the town yourself it may be worth speaking to a local.

Telltale signs of a potential boom area are:

  • Good schools
  • Affordable property prices
  • A local high street that’s not meeting its full potential
  • Solid transport links.

Typically, these will attract young couples and growing families priced out of their preferred parts of town – so may be next door to the trendiest areas, as a sort of ripple effect.

It’s because of capital gains that properties in postcodes with low rental yields don’t automatically represent bad investments.

Property prices in the Southeast have risen notoriously quickly over recent years, for instance, so many investors have profited handsomely from the rising market even though rents haven’t increased at the same rate.

A word of warning: remember, property prices can always go down as well as up. Planned transportation projects may not go ahead, and big local employers may shut up shop. So while previous increases are a helpful guide, you can’t rely on them to happen in future.